Maximus, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Q2 fiscal year 20 Maximus earnings conference call. At this time, all participants are in a listen-only mode. For the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star then one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Lisa Miles, Senior Vice President of Investor Relations. Thank you. Please go ahead.

Good morning, and thank you for joining us today. My name is Bruce Caswell, President and Chief Executive Officer, and Rick Nadeau, Chief Financial Officer. I would like to highlight that a presentation is available on the Investor Relations page of Maximus.com if you would like to follow along with today's prepared remarks. I would like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of the risks we face, including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the information contained in our earnings release today and our most recent forms 10Q and 10K filed with the SEC. The company does not assume any obligation to revise or update these forward-looking statements to reflect Subsequent events or circumstances except as required by law. Today's presentation may contain non-GAAP financial information. Management uses this information in its internal analysis of results, and we believe this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons. For reconciliation of the non-GAAP measures presented in this document, please see the company's most recent quarterly earnings press release. And with that, I'll hand the call over to Rick.

Thank you, Lisa. First, let me say that since the COVID-19 pandemic, Bruce and I have never been prouder to lead an organization with such heart, dedication, ingenuity, and collaboration at all. Underscoring the critical nature of our work, Many of our core program operations in the United States and abroad have seemed essential to ensure that vital government programs continue to operate and that citizens continue to receive critical assistance at a time when the need for health care and safety net programs is rising. The entire Maximus team has met this challenge and has worked tirelessly to ensure that we continue to support citizens during this unprecedented Our employees are accomplishing extraordinary things during the COVID-19 pandemic. This we'll discuss in greater detail, but I would like to highlight some important accomplishments. First and foremost, we implemented robust pay-leave options to ensure the safety and well-being of those employees who experience COVID-19-related absence, mandated social distancing across all operations, significantly enhanced our sanitation measures, Most importantly, we continue to transition more employees to work. Outside the United States, we have partnered with government in the United Kingdom to redeploy some of our healthcare professionals directly into the National Health Service, as well as case management and administrative staff for work and pensions by Vital Frontline. Our priority has been the health and safety of our employees and ensuring that we can continue to support are government clients. What model that takes government services. No one can predict with certainty the scale or length of disruption of the COVID-19 pandemic or how deep and severe the economic crisis is. We did our normal bottoms-up quarterly review in April in stating guidance for fiscal. I think it is important to give our investors Please note, however, that our actual results could vary from the guidance due to numerous factors, including a worsening of the pandemic, erosion due to budgetary pressures, steps taken by federal, provincial, state, or local governments, or limit office hours, later missed payments by customers, or supply chain disruptions, or safety equipment. Changes we have used are wider than typical. The increased risk and variability we face. It is possible that actual results could vary materially from our current expectations. We anticipate that fiscal 2020 revenue will range between $3.15 to $3.25 billion. Eluded earnings per share to range between $2.95 and Cash from operations is now expected to range between $250 and $300 million. Cash flow between $200 and $250 million. While we feel comfortable with this cash flow range, I will point out that delays in collections of receivables can cause significant variation. The remainder of the fiscal year, we anticipate continued disruption across all segments, offsetting favorability from new work. is expected to be most pronounced in our outside the U.S. segment. Some positive impacts in the two U.S. segments that in some cases we have won, other cases are perceived. Bruce will provide more detail in his second quarter results. COVID-19 impacts, as well as the challenges and opportunities that lie ahead for the second quarter of fiscal 2020. totaled $818.1 million, which did the full ramp up of the census contract U.S. Federal Services. Total company operating margin 4.6%, diluted earnings per share $0.33, two substantial impacts. First, we had a pandemic-related write-down of approximately $24 million, or $0.28 per share, related to the decline in estimates . . . . . . Thank you for joining us today. . . . . . . . . . . . . . . . . . . . . . . . . . . The current assumptions indicate economics for this segment will continue to experience minor disruption, a margin between 17 and 18%. Going ahead, not only have the Maximus operational teams been able to take on new work associated with a variety of COVID-related work. Further, the business development teams have launched and Keith's Address Needs Resource Caps. Revenue for the second quarter of fiscal 2020, West Federal Services, $193.4 million. All growth in this segment was organic, including the Citizen Engagement Center's growth was 6.7 by new work and growth. Operating margin for this segment in the The quarter of fiscal 2020 was 7.7%. Favorable impacts of the COVID-19 pandemic on performance-based work and ongoing investments in business. Priority of revenue in this segment is generated by cost-plus contracts. It means that we can recover certain COVID-related costs, such as increased facility cleaning on these contracts. This contract is now approaching its peak level of operations. . . . . . As a result, our contract has expanded to support the new deadline. We now estimate that we will deliver between $430 and $450 million. An increase from our previously expected revenue of $360 million. The economics of this segment are largely intact through fiscal year. The U.S. Federal Services segment is estimated to Deliver a full-year operating margin between $8 and $9 million. A slightly greater mix of cost plus well as our continued investment. The COVID-19 pandemic has had the most pronounced effect. It was $104 million. The segment had a loss of As a reminder, this segment has several significant performances. Estimates are tied directly to the job seeker outcome. Every goal of placing individuals in a firm sustained employment is economic. The revenue is recognized based on our estimate of the number of individuals we anticipate reaching. As a result of the pandemic, we reduced our estimates of those job seekers who are likely to achieve employment outcomes. The funding rules require us to record our best estimate of the... Therefore, the impact of those... This resulted in a pandemic-related write-down of approximately... ...or $0.28 per share, related to a decline in... Although we are continuing to serve as participants in programs where we can... Many participants have required them to self-isolate and the pool of available employment opportunities is currently suspended. The remainder of fiscal 2020 will experience impacts from the COVID-19 pandemic related to our HOSS contract. While our face-to-face assessments work is currently suspended, we are working to introduce telephone assessments and continuing to process They are proud to partner with government to be a part of the solution to this worldwide health crisis. In the past few weeks, many of our health care professionals volunteered to be seconded in an agency capacity for those employees. We receive reimbursement of most of our costs, but we will not earn revenue. We expect the fourth quarter for this segment to come in a little below break-even. Our objective is for progressive improvement in the third quarter with an aim to cut the second quarter loss in half. Looking ahead, we are starting to see new opportunities develop. That's the significant impact of the global labor markets. In 2021 and beyond, we anticipate we will see an expanded need for our services. Our governments expand. with widespread unemployment. Today, we are in the process of transitioning some of our outcomes in the services contract. Trust recovery contracts provide considerably more stability and these contract changes will be work with the department model with raising unemployment. According to the balance sheet, There's the second quarter with cash and cash equivalents of approximately $100 million. Cash provided by operations was $22 million. Free cash flow was $13.4 million. Cash provided by operations was tempered by a combination of lower income, higher proportion of income tax quarter, and accounts receivable grew in the first half of the fiscal year due to increased revenue. Those were 72 days. We're continuing to monitor collections closely. I'd like to point out that one day of DSO is roughly a billion dollars. We entered the COVID-19 pandemic with a strong balance sheet and a resolve to manage liquidity. We faced uncertainties, including state budgetary pressures, from our customers. The empirical experience during economic downturns and our designation as an essential service provider in the United States puts us in a favorable position in working with our customers. However, we recognize that our customers are experiencing significant disruption to their tax receipts. We will continue to manage the company in a conservative manner. Going forward, the management team and the board of directors intend to take a prudent and constructive approach to cash deployment over the coming months. Currently, we do not anticipate a disruption to our future quarterly cash dividends. The quarterly 10b-5-1 share purchase plan, declared naturally in March, half embedded in the program, was met. We have paused share purchases in the activity, but we see an easing of the uncertainties from the COVID-19 pandemic. We continue to work on smaller, tuck-in transactions that will support future organic growth. We are optimistic that the maximums will emerge from this disruption as a strong economy. We have been able to demonstrate that we can navigate, innovate, and showcase our operational effectiveness, challenging events, and continuing to support the most vulnerable populations in our workforces. Thank you, Rick, and good morning, everyone. Thank you, Rick. I could not be more proud of our employees' efforts during these unprecedented times. COVID-19 is a global pandemic that impacts all of us.

for working around the clock to ensure we protect our employees while still serving government and the vulnerable populations who rely on the health and human services programs we offer, demand which is only increasing under the impact of this pandemic. In mid-March, we rapidly developed a response to fast-moving COVID-19 challenges and implemented new policies emphasizing paid sick leave, social distancing, and enhanced cleaning regimens to keep our employees safe The slide in my presentation illustrates many of the protections and resources we have provided, and I'll touch on some of the most salient actions taken in my remarks. To hover over each box, additional details will be highlighted for each initiative. As part of our efforts, we are following the more restrictive recommendations outlined in the federal Families First Coronavirus Response Act. In some cases, we are exceeding the Act. While the Act does not apply to maximums because we have more than 50 employees, We felt it provided a good benchmark for saving and safeguarding. Our income continuity plans are fully funded by Maximus for a variety of scenarios, including quarantine, childcare, government mandated restrictions, closure, and employees who are in high-risk categories. Under these leave options, an employee's health insurance is also protected. We are not requiring them to recruit paid time off, or PTO, in order to access these resources. We've also realized that employee stress and anxiety is heightened, balancing the strains of normal life during the crisis. All consistent and transparent communications to our staff remain vital. To support our team members, we've launched helpful videos from our Chief Medical Officer, mental health seminars, virtual development training classes, as well as wellness apps. Moving on to the next slide. One of the most impressive things we've done, an ongoing transition of employees to work from home. This has been a heroic effort in procuring new equipment, increasing network capacity, and deploying new services, all while keeping operations running to meet program needs. There are significant IT challenges transitioning to a work-from-home model, ranging from information security and privacy requirements to ensuring continuity of services. Any government programs were never designed to be carried out in a remote environment, presenting high hurdles to enable remote work. Transition is also taking place during a pandemic-driven global IT equipment supply chain shortage. Equipment such as laptops and headsets are imperative for our customer service representatives to serve citizens. We've been working diligently with suppliers and have made great progress. XMIS has also been able to overcome these challenges by capitalizing on the strategic investments we've made in our IT infrastructure, including emerging technologies such as secure remote network platforms and cloud-based omnichannel telephony environments. For example, we leveraged our and more. We believe we're forging a path forward for government services longer term. The pandemic offers us a unique opportunity to test and learn new models with full support from our clients, opportunity to trial new ways of serving and engaging citizens who now more than ever need access to vital services. We also gain an entirely new data set, data to citizen engagement, channel preferences, and agent performance, which enables us to optimize this model. It also allows us long-term to evaluate the optimal environment for each individual employee. While not every employee is best matched to a remote work environment, results from early pilots indicate no statistically significant reduction in agent performance on the contracts being measured. The type of robust data will be meaningful in solutioning new delivery methods. As we move into the next phase of this pandemic, I believe one of the most important ways to safeguard employees, keep operations running, and ensure citizens can access the services they need is to implement an employee wellness check before and during their workday. Our digital team developed a health assessment mobile application called Clear to Work. An employee will use the app before coming to work each day. The app takes them through a series of questions A self-administered temperature check. The app either clears an employee to come to work or instructs them to stay at home that day. The employee is cleared and a time-limited digital credential to show when they arrive at work and then complete a second temperature. The app was developed and implemented in roughly two weeks and is being systematically deployed across operational sites. We will review other geographic rollouts, health guidance, and requirements. We've also implemented a mandatory face covering policy across our U.S. operations while ensuring our sourcing approach. While we've talked about the operational disruptions and how we're tackling those, we've been pleased at how our teams have responded to the calls for support from our clients as they rapidly design and procure solutions to address the pandemic. Our ability to quickly pivot has underscored the resilience of our business model and our position as a trusted Over the last four weeks, we've been helping our clients solve real challenges of rising caseloads and reduced resources. At this end, we've won a number of COVID-related contracts, as well as new work associated with rising unemployment. Let's start with our federal team. As you may recall, Maximus was already supporting the CDC's information line. At the beginning of the pandemic, the CDC requested that Maximus provide bilingual support for COVID-19 phone lines and emails. 24-7 coverage began with 50 agents and has grown to 250, plus more than 40 nurses. Most recent statistics show responding to more than 16,000 calls and emails per day. We're also selected to deliver the Federal Health and Human Services Community-Based Testing Center. Under this contract, Maximus provides COVID-19 test results to patients that are tested at various federal testing centers across the nation. Our team did an astounding job in solutioning a turnkey contact center in less than six days. We've seen enormous growth. The contract launched with 260 call centers, outbound calls to patients to 47 emergency testing facilities. Today, a team of more than 2,000 agents now contacts 10,000 individuals per day. Real-time geomapping of COVID-19 test results to the U.S. Maximus has played a critical role in supporting federal agencies following the CARES Act implementation. Firstly, Maximus supported the IRS to ensure that the economic impact payments were paid in a timely manner while continuing our normal tax season support. Secondly, as you may be aware, Maximus operates the debt management process. The Act temporarily waived payment on student loans during the pandemic. Within 10 days of this waiver, Maximus sent 1 million letters to student loan holders. made system changes to support. From the state level, we've partnered with the California Department of Public Health to answer phone calls from state residents and provide basic, general, non-medical information about COVID. We're in the process of working to potentially expand our offerings to further engage and support California. Importantly, the project is using an entirely work-from-home model, protecting our staff and helping employ residents who may have experienced job loss during the crisis. Since mid-April, Maximus has been providing New York State with dedicated COVID-19 support, including ramping up the state's COVID-19 hotline to screen and schedule tests for New Yorkers, as well as helping the state manage outbound calls to reach healthcare workers to volunteer to help with the COVID crisis. Our call center representatives have managed to successfully connect 30,000 New Yorkers to COVID-19 testing resources. And just last week, we won our first state contract in Indiana to centralize contact tracing for Hoosiers who test positive for COVID-19. We will hire and train an estimated 500 people under the supervision of Indiana State Department of Health epidemiologists. The remote call center is anticipated to be operational by May 11. We will support individuals at least through the end of the year, if not longer. Our Canadian team also quickly adapted and, in only two days, launched a COVID-19 information line for our British Columbia Provincial Government client. Those team members answer important questions about job applications, employment concerns, quarantine non-compliance reports, and the like. Across the globe, unemployment benefit claims have skyrocketed. As of May 1st, more than 30 million people in the United States have filed claims triggered by the COVID-19 pandemic. and more downstream implications at all levels. Safety net programs like Medicaid, SNAP and others are expected to face similar surges in applications. Government programs face staffing, process and system challenges meeting the demand. Governments also face the daunting task of under a new normal, enabling citizens to return safely to normal life under the continuing threat of new outbreaks and the constant Maximus has rapidly responded to meet the immediate demand for information and application assistance while positioning to provide longer-term services. Let me give you a few examples of new work with compressed time scales that we have met with. In only eight days, we launched a contact center to support the... In North Carolina, we launched a new project to support questions pertaining to the unemployment insurance program. This was done in less than a week. We're also doing similar work in Arkansas, Rhode Island, and Vermont, responding to frequently asked questions and assisting residents with their unemployment updates. Across the country, other team members continue to support our Health and Human Services clients, offering vitally important services. Moving on to new awards and pipeline. A reported number of selected status as of March 31st. and much has changed since then. Before I address some of these dynamics, I'll briefly cover the awards in the pipeline at March 31st. For the second quarter of fiscal year 2020, signed awards were $729.8 million of total contract value at March 31st. Further, at March 31st, there were another $215.8 million worth of contracts that had been awarded but not yet signed. Let's turn our attention to our pipeline of addressable sales opportunities. Our total contract value pipeline at March 31st was $29.2 billion, compared to $30.6 billion reported in the first quarter of FY20. Of our total pipeline of sales opportunities, 65.7% represents new work. In regard to pipeline dynamics, we cannot accurately predict the pattern this pandemic may follow, nor the timing and form of the recovery. Certain clients impacted by COVID-19 are making awards in record time. and relying heavily on existing contract relationships and trusted partners like Maximus. This comes in some cases at the cost of delaying other prior procurements that were in process. In other instances, particularly in federal, agencies not impacted significantly by the pandemic have stuck closely to procurement schedules. Therefore, it's important to put all of this in context. While we're excited about the new work, many of the new COVID-related programs are expected to be temporary but provide flexibility to scale and extend services as circumstances warrant. We also must be mindful that many of our government clients will likely face budgetary pressures as a result of a pandemic-driven economic recession. While we're cautiously optimistic, it's difficult to predict what impact these events may have on erosion, timing on new work, and simply getting some of our operations somewhat of a normal cadence. Updated guidance, of course, incorporates all of these dynamics based on what we know today. We actively manage a portfolio of work and have earned a reputation as a long-term partner, all of which enables us to adapt to changing economic tides. We've been inspired by the dedication, selflessness, and resilience seen across our business in recent years. The resilience of our business model has also been impressive, our employees even more so. As mentioned, one of the most inspiring stories comes from our colleagues in the United States. were in the process of deploying nearly 1,000 volunteer doctors, nurses, and other clinicians to the NHS to provide vital support on the front line. Dr. Paul Williams, Division President of Maximus UK, volunteered to serve along with our team members. In addition, non-clinical colleagues are preparing for redeployment in support of the national effort. Since the true heart of Maximus are more than 35,000 employees, It's remarkable to witness how our colleagues are coming together to support the global effort against this pandemic. The safety and well-being of our employees will continue to remain our top priority. Governments are also planning for the time when, as we emerge from this crisis, our core capabilities in finding jobs for the unemployed, ensuring access to health care, and administering critical safety net programs are needed more than ever. The world will be a different place for sure, but so will the landscape for services and how they're delivered. The work we've done in helping clients innovate, scale, meet citizens' needs. New opportunities will also emerge. I'm in a position to respond. With that, we'll open up the line.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. And to withdraw your question, press the pound or hash key. Please limit yourself to one initial question with one follow-up. First question is from Charles Strausser with CJS Securities. Your line is open.

Good morning, guys. This is Brendan on for Charlie. I wanted to ask, you've had a lot of great color on what's going on with COVID-19 not only affecting operations but also opportunities as well. Is there any way you can quantify the The benefits from it in this quarter you just reported, and then anyway, you can talk about how it affects your guidance that you reinstated and could you quantify that?

Hey, Brendan, it's Bruce. Good morning, and thanks for the question. I'll begin and then I'll turn it over to Rick to answer the second part of your question. I can share with you that as of two days ago, we've added approximately $140 million of signed and unsigned awards for COVID-19-related work across all three of our business segments. And we gave a little bit of color on that in the call, talking about some of the work, for example, that we picked up in Canada and, of course, in the federal segment and in the U.S. Health and Human Services segment, particularly as it relates to the contact tracing work and unemployment insurance work. So that's all subsequent to the March 31 reporting period. We view the work to be generally short term in nature. And at the same time, because it's such a fluid environment, I literally need to say as of two days ago, because we're very active in terms of inbound proposal activity and procurement activities as states continue to work to put the programs in place that they need to return to normal and address these immediate needs. I'll also say that in doing this, we establish relationships with new customers. And those new customers can include state public health departments. They can include state departments of climate security. And while we intend to support them fully during this short-term need, it allows us to also be able to be a trusted vendor to turn to as those needs could develop into longer-term needs. And so it is very dynamic, potentially fluid. But the $140 million total contract value is the signed and unsigned awards since the close of the quarter. Rick, would you like to add anything further to that?

Sure. Brendan, you know, our goal in reinstating guidance today was to provide investors with a view of our current expectation based on assumptions that we made when we were completing our planning for the remainder of the year. You know, it represents our best assessment at that time or as of today. We could get further erosion due to COVID, which would drag us down toward the lower end of guidance. Conversely, increased COVID-19-related work pushes us up toward the upper end of the guidance. I want to make sure I caution you, though. There's more than a normal level of uncertainty at this time. That uncertainty could result in greater variability than we've experienced in the past few years, but we're seeing positive signs in some of the COVID-19 and, you know, a pipeline, as Bruce indicated.

Great, thank you. And then if I have one follow-up, just with the, I guess, how it relates to outside the U.S., the, you know, obviously you had to write down, you know, UK and Australia, which, you know, makes sense, kind of being triggered given the employment environment. At the same time, though, there's the are clearly going to be an opportunity down the road for re-employment and real welfare of the work kind of stuff. So I guess, how do you feel about those businesses outside the US and even within the US as well? And obviously, that's not something you might see this next quarter, but what are you thinking over the next couple of years about how those are positioned? Thank you.

A great question, Brendan. And actually, I think you've read the situation Correctly, you know, we've always said that we believe that these businesses, when you frame it, you know, 50% of our business outside the U.S. is in employment services, and we view it to be a countercyclical business. And so, as you've said, we're kind of on the down cycle of that with, you know, folks losing their jobs and no longer able to be sustained in their employment, and hence the impact on sustainment payments under existing contracts. But by definition, these contracts are volume-based in their nature, and as the volumes come back into the system, They tend to perform well. And so I'd comment on a couple of things. First, I think we're very well positioned in countries like the United Kingdom and Australia to capitalize as the volumes return into those systems. It's predicated, of course, on the economies turning around and the pace of the recovery. And Rick, I think, rightly cautioned in his remarks that we can't predict at this time what the shape and the timing of the recovery will look like. In addition to that, Rick also noted that some of our UK employment services contracts have been transitioned into a cost recovery type arrangement so that we can continue to keep our staff on board. It's important to government that we do that so that we've got the staff in place and the program ready as people come back into those programs. Another thing that's probably worth noting is that in the period immediately preceding COVID-19, we were at such a state of nearly full employment that many of these programs were designed really more to serve the hardest to serve population. So folks with chronic issues that have prevented their employment for years. And we've spoken about that on prior calls. Governments now are saying, how do we need to modify the structure of these employment services programs to really address the newly unemployed, the more mainstream unemployed, and what resources need to be in place, whether they're digital services or other types of services, to support that population. So you can imagine we're spending time not just with industry partners through trade associations and so forth, but also directly with our customers and the commissioners of these programs to work with them to figure out what the best model will be, how to deliver those new programs at scale to meet the needs of the newly unemployed. in the aftermath of this current outbreak.

And the next question, please.

The next question is from Dave Styblo with Jefferies. Your line is open.

Hi there. Good morning, and thanks for the question. Wanted to inquire a little bit more about the bridge on the dollar EPS reduction to guidance. I don't think I fully understand all the moving parts there, so I'm hoping you can fill in a couple of blanks there. I think the $0.28 is pretty clear for the welfare to work right down. I think the prior guidance maybe sort of contemplated some of the wildfires in Australia, so call that maybe $0.40, and then I know you're picking up a little bit of revenue from the census contract and some of the other new work, but what is the other large gap in there that's a plug towards EPS being down a dollar. Is that really related to the UK HOSP contract or some other elements of business maybe perhaps shifting to a cost model instead of a performance model?

Hey, David, it's Bruce. Thanks for the question. I'll start and then I'll ask Rick to add any further color. You know, it almost goes without saying that it's impossible to predict how the year would have developed. And as we finish the first quarter, We thought we had more signs that were pointing toward the bottom end of the prior guidance range. But there were also opportunities in the hopper. So it's difficult to sit here and speculate as to what erosion we would have seen had things played out without COVID, how the New Work Awards that I mentioned would have looked like. And the reality is really at the midway point of our fiscal year, we have gone on to a completely different vector than what we anticipated. and I'll just as further color, I've been amazed at the resilience of our business model and at the ability to pivot to the work from home arrangement in many instances that we talked about in our prepared remarks and our ability to actually work with our customers to gain their permission to do that. So you could have seen certainly much more of a disruptive moment in terms of trying to meet demand that remained consistent. And if anything, this has become a more Demand Stimulative Environment in the near term for us. So now we're resetting, and the makeup of deals in our pipeline and the near term kind of field of vision that we have has changed. Some opportunities being pushed out, other opportunities, as we've discussed, developing literally overnight. The response times that we've seen as RFPs have come through the pipeline have been, in many instances, like 48 hours. So we're seeing both of those dynamics. But I'll turn it over to Rick to add any further color addressing that bridge as you've requested.

Sure, Dave. As I said in my prepared comments, the most impact that we've had is in the OUS segment. So the welfare to work contracts that we've talked about, that $24 million was a write down of revenue that we had recorded based on our expectations of how much future outcomes payments we would actually collect. I do expect to continue to have you know revenue impact from COVID-19 in those welfare-to-work contracts in Q3 and then to a lesser extent in Q4. The right HOSS is also impacted we are not doing face-to-face assessments on HOSS at this time and I did talk about the secondment that will occur but I think that the revenue and the profit level on HOSS will be negatively impacted.

Okay and so That's a big part of the $0.60 delta, I guess.

Do you have a follow-up?

I do. Comments on M&A, appreciate that, and the capital position line to preserve capital. Sounds like you're still open to some smaller assets that would either, I suspect, enhance capabilities or expand geographic coverage. Just wanted to get a sense of have some opportunities come up in light of COVID where perhaps some other smaller companies are having trouble weathering the storm and have presented some opportunities for you guys to take a closer look at those or is there anything new in the pipeline that we should be thinking about again in light of the COVID conditions?

Question, Dave. So the short answer is yes in terms of opportunities. As Rick said, we continue to look at really tuck-in type Acquisitions. And I thought it might be helpful to maybe give you a better sense of the criteria that we used to value. And so as we think about a tuck-in, we generally say it needs to meet criteria including, number one, being closely aligned with our current business. So it's really no more than one adjacency away. Number two, it has to be available at a reasonable price and under agreeable terms. you're right in saying that in this current environment there certainly are smaller businesses that are having more of a struggle and that can create opportunities for us to add capabilities and not just here in the United States but even overseas and number three the third criteria would be we don't want any kind of tuck-in to create significant transaction or integration risk or effort or expense for us so we've historically executed these tuck-ins really in all kind of economic conditions including now in a tactical manner to position the company for anticipated growth in new business areas, to add capabilities, to position ourselves in a new geography, generally where time is of the essence and we don't have either capability or timing to create that capability or presence organically. Historically, our tuck-ins have been under about $50 million in purchase price. Many of those have been in the $5 million to $15 million range. but I'll turn it over to Rick and he can add a little bit more color on that.

Yeah, you know, Dave, so size does impact whether or not something's a tuck-in but I didn't want that, I think Bruce's answer's good from the standpoint that we don't want that to be the, give you the impression that's the only item. I mean, I could see a $75 million revenue company actually meeting the tuck-in criteria. I could also see a $40 million company or some that's even smaller not meeting that It really goes back to looking at all of the factors that Bruce looked at.

Great. Thanks, Dave. Next question, please.

And again, just as a reminder, please press star 1 if you'd like to ask a question. The next question is from Donald Hooker with KeyBank. Your line is open.

Great. Great. Thank you for the question. Good morning. So I wanted to hop back on this outside of the U.S. Thematic here. So obviously there's this write-down in the quarter. As we go forward, can you kind of maybe provide some visibility, perhaps longer term, in terms of how these contracts might be structured and what the right operating margin for you guys is in those contracts going forward so we can think about kind of a ramp back up over the next several years to a target operating margin? in that segment.

Well, I'll begin and then turn it over to Rick for that. So, you know, these contracts are performance-based contracts in their nature, and as the volumes come through, I don't anticipate, at least in one of the geographies, a significant change in contract structure. One question, however, that we've had for the commissioners in that geography is, would they consider shifting the budget allocation away from what historically has been 30% kind of upfront and 70% performance-based. More toward, you know, if we think about after the last recession, the structure in that contract was more 50-50. And that's important when you start considering that you could see like a W-shaped recovery, right? Because you could get into a situation where you've been paid your 30% to place cases and you're getting kind of that fixed payment and then We find ourselves, in some cases, back where we are, where with the WCAG recovery, you have another downturn. The folks that have been placed into positions aren't unable to sustain them, and then you're kind of back at it again. So I think shifting the allocation more away from 30-70 to something closer to what we saw historically, 50-50, would be an example of a conversation that we'd want to have with a contracting authority about what form a contract like this should take going forward. With that as the premise, I think that we'd feel good if we're seeing operating income margins for the outside U.S. employment services business in what we would characterize as the historical company target operating margins of 10 to 15%. and we've looked hard at the, and Rick's team's done a great job of looking at the historical performance of those businesses going back 10 years and you can see situations where they function well within that range and in some instances above that and when you normalize for contract structure as I've indicated in the beginning of my remarks, it's very plausible that you could see that. As I mentioned, – very kind of live topic right now because the commissioners of these programs are taking feedback not just from us but from other industry participants on what shape these contracts need to take, especially where in some places like the United Kingdom they have drifted far toward serving the most hard-to-serve and difficult-to-place population, and that's not what we're talking about now. So, Rick, would you like to add anything further?

Yes, sure. Now, I think that Bruce made most of the points that I wanted to make on this topic, but it really is too early to make a complete determination. But revenue and margin should improve in this new environment created by the COVID-19 pandemic, given our tendency in this area to be countercyclical. But I did want to emphasize something that Bruce said before. We are already positioned well in the UK and Australia to capitalize as our contracts are volumes-based and the volume of transactions should increase. Yes, you're right, I've been saying all along that we are not satisfied with our OUS margins or outside US margins, but this coronavirus changes our outlook with respect to those businesses. And we do want all of our segments to deliver between 10 and 15%.

Okay, and then my follow-up question would be, When I look at the sales pipeline with all the ebbs and flows and all the disorientation around the current environment, how much of that sales pipeline, what should we assume sort of a win rate would be against that sales pipeline at this point? I know you guys have expanded into new areas and there's new opportunities emerging around COVID-19. What is that $29 billion plus of sales pipeline? What is the conversion rate of that?

Well, I'll begin again. And as we have, we're going to tag team this one. So there's really two components that you have to think about. And they're not numbers that we have historically disclosed in any detail. One is what we call the adjudication rate. So of the pipeline that's in front of you, what percentage of it actually ultimately is adjudicated to some form of outcome, a win or a loss or what have you. And then the second component is, of course, the win rate. And I think it is fair to say that in an environment when you are expanding into new agencies with new customers. We've spoken about this before in terms of the efforts in the federal business to expand our footprint with new agencies and customers. You're not going to see what you would customarily see in industry win rates. And having been in this business for 30 years, we've customarily said, well, if your new work win rate is in the 30% range, you're really doing well. So I think 20% to 25% is a great win rate blended between new customers and existing customers. and certainly maybe a little lower depending on how far you're reaching into new places. But Rick, how would you?

Yeah, that's a great answer. I would want to emphasize the point that it is a pipeline of opportunities. When we look at them, we don't bid everything that's in that pipeline. We want to make sure that we chase things in a smart way and that we spend our B and P, our bid and proposal money wisely. If we're looking at a program that has a good formidable competitor, incumbent competitor, we might decide, we look at it, we might decide not to bid it because that would be wasteful of our BNP dollars and we'll save them for a situation where we have a better chance of a win. I want to make sure it's not just the win rate that you need to apply the factor against that pipeline.

Next question, please.

And again, just a reminder, star one if you'd like to ask a question. Our next question is from Jamie Stockton with Wells Fargo. Your line is open.

Good morning. Thanks for taking my questions. I guess maybe the first one is just about the IT shortage comments. And in general, are you where you need to be today? And if you're not, when do you think you'll get there?

Hey, Jamie, it's Bruce. Thanks for the question. So it's an interesting dynamic because there's a couple of things. First of all, there's the supply that we need to continue to move a greater portion of our workforce to work from home. And then there's, let's call it business as usual supply, right, that we need because we're coming into, for example, the open enrollment season. And so, you know, let me give you just a little bit of color on where we stand currently. From a work-from-home perspective, currently we've got 45% of our U.S. employees working from home. Another 45% are working on-site, you know, practicing social distancing, wearing face masks and so forth, as we've discussed. And the balance are on leave. And it's important to note that there are some contracts in the U.S. portfolio where working from home is not possible. And we've had to implement, as we've, I think, mentioned here, and others. We've been able to do that while maintaining service levels on some pretty critical mission-critical contracts for our customers and earned accolades from our customers in the process. So you have 45% in the U.S. working from home, 45% not, that's 90. The balance then are on leave. for COVID-19-related qualifying conditions, which doesn't mean that they're all sick, but the conditions can include needing, for example, to provide childcare where they have no alternative, caring for a sick family member, and so forth. Outside the U.S., there have been different regional responses. As you can imagine, approximately 76% of our workforce is working from home outside the U.S., but there are examples as well where working from home is not possible. In Australia, for example, Our Australian colleagues have to maintain a safe level of storefront operations to serve job seekers and individuals who have now come through the public assistance kind of phase of this and now are going to be coming into the employment schemes that we operate. And as long as we can continue to do that, you're going to have a portion of that workforce that has to be in the offices. So the IT supply has mostly been machines. for a number of reasons not adopted a significant BYOD policy. We prefer to have employees use a standard image and securely connect through in any instances where possible to a remote workspace environment. We've been using Amazon workspaces, as I mentioned, and that way we can protect critical PHI, PII, and other information. Surprisingly also, there's been a shortage of headsets. And obviously when you're in a contact center business, that's one of the hardest things to solution. But we're working through it. We're not exactly where we need to be, but we're making progress. And we're also mindful of the fact that as we transition to open enrollment, we're equally focused on the production of and delivery estimates that we're getting from our suppliers to make sure that as we ramp up, we have adequate capacity. And in fact, I think that we may see a need for greater capacity during this upcoming open enrollment period due to the pandemic itself driving greater volumes.

That's great. And then maybe my follow up, I look at the OPEX for U.S. Health and Human Services. It was up a decent amount sequentially. Should we think about that as a new normal or were there elevated costs there related to COVID or something else that could allow that to come down incrementally?

So, Jamie, I'm going to add one more thing to the prior answer and then ask Rick to answer this one that you've just asked. I did want to note that we have an essential services designation from the federal government which does help us get closer to the front of the line when it comes to meeting the IT demands that we have with our suppliers. Okay, and then I'll turn it over to Rick.

Yes, two things in there. The U.S. Health and Human Services segment had an increase in their receivable reserves. Some of that due to payment concerns with respect to the COVID-19 pandemic. We went through all of our receivables and looked at them very carefully and made some assessments based on what we were seeing at that particular point with respect to collectability. And we did have a billing dispute with one of our customers and that receivable is reserved. And we are seeing some incremental costs with respect to the COVID-19 pandemic. Remember that the U.S. Health and Human Services segment is primarily performance-based contracts. And so when we have those incremental costs, they will fall to The bottom line, as opposed to the U.S. federal segment, which is much more of a cost-plus type of environment. So when we have incremental costs, those costs, as long as they are reasonable, are collectible under our contract. So, yes, we did have an increase there, but it was primarily COVID-related, plus that billing dispute I described.

Thank you. Next question, please.

I'm showing no further questions at this time. And with that, ladies and gentlemen, this will conclude today's conference call. Thank you for participating and you may now disconnect.